Every year around this time I summarise to my family and close colleagues the summary of Berkshire Hathaway annual meeting 2012 which happened last night Australia time.
My sources are three LIVE blogs - from Wall Street Journal, The Motley Fool and The New York Times.
Here is the summary of this year's annual meeting's discussion points I found interesting:
On his Health and his Prostrate Cancer situation:
Buffett: "I feel terrific. I always feel terrific. I love what I do, I work with people I love. It's more fun every day. I seem to have a good immune system."
"I have four doctors. At least a few of them own Berkshire stock. My wife, my daughter, and I listened to the four of them a few weeks ago. They described the various alternatives. The ones they recommend do not require a day of hospitalization. Don't require a day off work. 99%+ survival rate. This is a minor event."
Munger: "I don't know (if I have prostate cancer) because I don't let them test for it."
"I rather resent the attention he (Buffett) is getting."
Buffett: "In all seriousness, it is a non-event. The med center is about two minutes from the office. For two months, I'll walk over there."
On Berkshire Succession and the CEO being the Chief Risk Officer:
Warren Buffett: "The CEO of any large (particularly financial) company should be the Chief Risk Officer as well. Not a function that should be delegated. I am the Chief Risk Officer at Berkshire. Up to me to understand anything that would hit us in a catastrophic way. I would not select any successor that did not possess that ability. Person at the top must have good visibility into insurance operations and managers." [Tri: I think it's going to be AJIT JAIN].
"Basic risks could include excessive leverage or insurance risk."
Charlie Munger: "Not only is risk frequently delegated, but it was delegated to people who managed it badly.", "Value-at-risk is one of the dumbest metrics ever." and
"Favorite risk control example: young employee was fired once 'how can you fire me - I'm one of your top producers?'... answer: I'm old and rich and you make me nervous"
Buffett: "Charlie and I think about worst cases all the time."
"I don't like ever exposing us to anything that would cause me to worry about Berkshire's financial position if the Federal Reserve were hit by a nuclear bomb or something."
"We think about worst cases all the time, then we add a big margin of safety. I enjoyed tossing newspapers, but I don't want to go back to that again."
"We won't take a risk (even a favorable one) if the downside means that Berkshire will go broke. We'll never risk what we have and need for things we don't have and don't need."
Buffett: "I don't think my successor will be able to do every deal that I've done, but most of them. Berkshire will still have tremendous financial strength."
"The successor we have in mind would not leave for more lucrative jobs. He/she loves the Berkshire culture. Successor doesn't need money -- will only work because he/she finds it to be the most enjoyable thing in the world."
On Berkshire's recent Sweetheart Deals (Goldman preferred, GE preferred etc.) and how they might not be there after Buffett is gone:
Buffett: "The negotiated deals (Goldman Sachs, GE) were not extremely meaningful to Berkshire. These deals were just peanuts compared to the value created by buying businesses like Geico, BNSF.
On China and Giving Advice:
An audience asked Buffett and Munger about them giving advice to China.
Munger: "We're not spending much time giving advice to China... China's been doing very well from a very tough start. To some extent we should seek advice rather than giving."
Buffett: "In almost sixty years of investing, we've found it practically useless to give advice to anyone." and "we rarely give advice to the CEOs of our owned companies. If we thought that the success of our investment depended on them following our advice, we'd probably move on to something else."
On China having great companies like Coca-Cola one day - Buffett: "China has some great companies already."
"We tend to export certain products well -- consumer products. China's got some huge companies. They may eclipse the market value of some US companies."
On Berkshire's Market Value now:
Buffett: "If we could have our way, Berkshire stock would trade once a year (at Warren and Charlie's estimate of intrinsic value)." and "Fair value is significantly above 110% of book value." [Tri: Currently it's about 114% of book value].
Buffett: "We've run Berkshire for 47 years. There have been 4 or 5 times when we thought it was significantly undervalued. We saw the stock get cut roughly in half four times."
"The beauty of stocks is they do sell at silly prices sometimes. That's how Charlie and I got rich."
"Mr. Market is kind of a psychotic drunk. He will do very weird things sometimes. Remember, he's there to serve you, not guide you."
"It's built into the system that stocks get mispriced. Berkshire is no exception. Berkshire tends to track its intrinsic value more closely than most businesses."
"At some point, Berkshire will be significantly overvalued. At some point, it will be significantly undervalued."
"You don't have to do anything to make money in the stock market. Stick with businesses that you think you can value. It's a marvelous game."
On US Banking vs European Banking:
Buffett: "US banking system is in fine shape. US banks are far better positioned than they were 3 or 4 years ago. Buttressed their capital in a big way. Bigger banks have liquidity coming out their ears."
Buffett: "European Central Bank had to replace funding that was running off from European banks. Euro banks need more capital, couldn't raise it at advantageous prices. ECB solved that problem. Europe has a lot of problems."
Munger: "[Europe is] difficult without fiscal union... we're more comfortable with the risk profiles in the US."
Buffett: "It's night and day. In the fall of 2008, Bernanke and Paulson would do whatever it took. You knew they had the power and the will. Imagine if the governors of 17 US states had to act in tandem back in 2008. Euro banks and US banks are in two very different categories."
"We have seen the ECB give $1 trillion to banks. It's like giving a guy with a bad margin account even more money to play with."
On Current Prices of Energy and Energy Independence:
Munger: "Never thought 50:1 ratio of Oil: Natural Gas would exist."
Buffett: "Never thought this big a discrepancy between oil and nat gas was possible."
Munger: "I think the idea of energy independence is the most foolish idea I've ever heard adults talk about. We don't want energy independence, we want to conserve the stuff."
On GEICO:
Buffett: "Geico is worth a whole lot more than tangible book value. Estimates around $15B or so."
Buffett: "I would value Geico differently than General Re. I would say Geico has an intrinsic value that's significantly greater than its net worth + float."
"General Re was off the track when we bought it. More concerned with growth than profitability." Munger: "We finally got it fixed."
"At Geico it's very reasonable to expect profitable underwriting and growing float for as far as the eye can see. This is possible because Geico is the low-cost producer. Has real advantages that make it tough for other companies to duplicate."
On MBA and Business School Education:
Buffett: "It is astounding to me how business schools have focused on one fad after another in finance theory. Usually very mathematically based."
"Almost impossible to resist if you're hoping to advance along an academic career path."
"I would have a course on how to value a business and how to think about markets. Far more valuable than modern portfolio theory or option pricing."
Munger: "The optimal way to price options is not to use the Black-Scholes method, which is the current default method."
On the Buffett rule (on Taxation):
Buffett: "Tax rate should be commensurate with what you earned. Under the Buffett Rule, we would have a minimum tax for very, very high earners that would restore their rate to what it used to be. It would affect very, very, very few people."
On Renewables energy:
Buffett: "We're much bigger in wind than solar (although increasing presence in solar)."
"I don't think any solar or wind would be working without subsidies."
Munger: "We need to take a lot of power from renewables. It's wise to subsidise the development of that sector."
On Future Acquisitions/Investments:
Buffett: "We considered one a month or two ago. About $22B. I wish we could have made it. We won't use our stock at all."
"Used stock for BNSF acquisition, that was a mistake. We would not use our stock (as currency for an acquisition) now."
" We won't take our cash below $20B."
"We are investing heavily in the US. We'd like to do more business in the United States... and India, Korea, Japan -- you name it."
"There is no shortage of opportunity in the US. It's a real land of opportunity."
"Cash is still our favorite medium for purchase."
Answering the Question of a young 26 year old on what would Buffett do if he were 26 today:
Buffett: "I would probably do very much what I have done in life, only I would try to do it earlier. I would try to develop an audited record of performance as early as I could to attract money. Then I would turn to something much more interesting: buying businesses to keep. I don't want to be buying and selling businesses."
On Macro Factors:
Buffett: "Everybody thinks we sit around and talk about macro factors. We don't have any discussions about that."
On Berkshire's existing Businesses - which ones have done well and why:
Buffett: "The big ones have done well. Railroads are an asset that can't be duplicated. Move vital goods in an environmentally friendly way. Much better business than it was five or ten years ago."
"Geico has also improved a lot. Approaching 10% market share now."
Munger: "80% of our businesses have improved their positions."
Buffett: "The mistakes we've made are where I misjudged the competitive position of the business."
On Gold:
Buffett: "When we took over Berkshire, gold was at $20, and Berkshire was at $15. Gold is now at $1600 and Berkshire is $120,000."
"It's very hard for an unproductive investment to be a productive investment over a long period of time."
On the Newspaper Business / Industry:
Buffett: "Newspapers have 3 problems -- 2 of them are very difficult."
"If you go back 50 years, a newspaper was the primary source of information. That information in now available elsewhere -- more timely, and often free."
"Cites many examples (stocks, jobs, apartments, sports). Newspapers have lost primacy in all these areas."
"As long as they stay primary for local info, newspapers will be of interest."
"However, newspapers are expensive to distribute."
"And they're putting the same content online (for free) that they charge you for in the print version.."
"I think there's an opportunity for newspapers to exist in places where people care about the community. And don't give away that product."
"I think the economics of newspapers will work out okay. Not like the old days, but it still serves an important focus."
On Technology potentially destroying certain Industries (like Newspapers) & on Amazon.com:
Munger: "We had a similar situation with World Book... about 80% of that was destroyed by Bill Gates (laughter). We're still selling encyclopedias, but not as many as we used to."
Buffett: "Amazon's a tough one to figure. It could affect a lot of businesses that don't think they'll be affected. It's huge, it's a powerhouse."
"I thought originally that only young people would embrace the internet. If the consumer finds something that they like to do better... it's very hard to find people that have done business with Amazon that aren't happy."
Munger: "The internet (Amazon) will hugely affect a lot of people (retailers)."
On Wal-Mart and its current Bribery Scandal:
Buffett: "They made a mistake with how it was handled. But I don't think it changes the fundamental dynamics -- this is a good retailer."
"I don't think the earnings power of Wal-Mart five years from now will be materially affected."
Munger: "When you're as big as Wal-Mart, you're going to have the occasional problem."
Buffett: "When you're as big as Berkshire, you're going to have problems too. We have [270,000] employees at Berkshire. I guarantee someone right now is doing something wrong."
On Declining Businesses:
Buffett: "Generally speaking, it pays to stay away from declining businesses. We started with declining businesses: Textiles, US-made shoes, a department store in Baltimore."
"We have invested in several declining businesses. We think we understand them pretty well. There's a price that we will pay to invest there -- but that's not where we make our real money. I would never spend a lot of time studying a declining business. The same amount of energy and intelligence devoted to other businesses will work out better."
Munger: "We started with declining businesses. Textiles, US-made shoes, a department store in Baltimore."
On Google and Apple:
Buffett: "Both extraordinary companies, obviously. Huge companies that make lots of money, great returns on capital, tough to dislodge. I would not be at all surprised to see them worth more money 10 years from now..."
"But I cannot get to the level of conviction necessary to buy them."
Munger: "Other people will always understand those companies better than we do.. .we have the reverse of 'an edge'."
Buffett: "The chances of being way wrong in IBM are probably less than being way wrong in Google or Apple -- at least for us."
"Apple makes brilliant products, I just don't know how to value it."
On How do you Supervise Businesses like BNSF:
Buffett: "BNSF runs their own business very much. I talk to (the CEO) on the phone probably once every three months or so. Fortunately, we've got economics on our side. That usually wins out."
"Railroad is a wonderful product. Railroad companies do have to be involved in politics. They need lobbyists, need to play the political game. It would be very dumb for the country to do anything that would discourage the railroad industry from spending capital to maintain infrastructure."
"Railroads have become so much more efficient, by a huge factor. It's a fundamentally very good way to move heavy stuff across a long distance."
Munger: "BNSF is a terrific business with terrific management."
On How to Share information across Berkshire's many Businesses:
Munger: "We don't share information across businesses."
Buffett: "We're the most uncoordinated [conglomerate]. We want our businesses to run very autonomously. We don't tell our managers how to run their businesses."
On Compensation committees and HR Departments:
Buffett: "Our businesses are all so different, it would be crazy to have some standard formula."
"I am the compensation committee. I am not overworked."
Munger: "The prostitution industry would be a step up for most compensation consultants."
On USA's GDP per capita Growth in the future:
Buffett: "If the population grows 1% a year and real GDP grows 2% a year, that would be remarkable. (Meaning that 3% growth is very good) it would result in a quadrupling of real GDP per capita over a century."
In my lifetime, the real GDP per capita has increased 6x. We have $48,000 GDP per capita. We are unbelievably rich."
Munger: "For a very mature economy with a lot of social safety net, I think 1% per capita [real GDP growth rate of America over the next 20 years] would be a sensational result."
On Berkshire paying Dividends one day:
Buffett: "By and large we feel (so far justifiably) that we can create more than a dollar of value by reinvesting every dollar we retain. For 47 years, that's been the case. If someone wants to create their own income stream, they can do so by selling shares."
"If we'd paid out dividends, our shareholders would be worth less money. I think that will continue to be the case."
Munger: "Dividend will come eventually, but we hope that's a long way off."
On Learning from Mistakes:
Buffett: "We make mistakes. We're always thinking about worst-case situations. I don't worry much about mistakes. The next mistake is always something different. I think I've learned more about people over the years. Ill make mistakes in people inevitably, but I'll recognize the extraordinary ones more easily than I would have 40 or 50 years ago."
Munger: "What we've done is learn enough from other people's mistakes - it's a much more pleasant way to learn your lessons."
Buffett: "In terms of financial history, I've always been absolutely absorbed by reading about disasters."
On Businesses with High Barriers to Entry:
Buffett: "If you gave me $10B, $20B, $30B and told me to knock off the Coca-Cola company with a new soft drink, I wouldn't have the slightest idea how to do that."
"Richard Branson came to this country with Virgin cola (they say a brand is a promise), and we haven't heard anything about that since."
Until this time next year!
Regards
Tri I. Suseno
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